Despite their overwhelming position, the six state banks operating in Algeria remain largely inefficient in stimulating productive investment. Aware of this problem, the government has decided to re-capitalize banks and has been lowering the interest rates applied to various types of loans. The six banks BADR, BNA, BEA, CNEP, BDL and CPA will witness an increase in their own funds, allowing them to engage in loan practices that are more in line with standard universal practices. This month (October 2005) several state banks will lower their rates, with a 0.25% reduction to 5.25% on investment loans. Two years ago the rate was 7%. Mortgage loans for holders of savings accounts will also carry a reduced rate of 5.75%, also down one-quarter point. For non-holders of savings accounts the mortgage rate will be 6.75%. But it will take some time before these efforts create a positive momentum in the banking sector and create a real credit culture.
The government's challenges in reforming the financial sector are monumental, although there is no shortage of blueprints for success. The IMF and the World Bank have been vocal about what to do to fix Algeria's financial sector. One step that the two have been encouraging to follow was to privatize at least one bank to learn from the process and send a positive signal to the market. Algeria has been pressed to "formulate an action plan for privatizing several public banks. In this regard, selling one public bank quickly to a reputable foreign bank would be important for its demonstration effect, including by transferring know-how to the sector, and would help contain the cost of restructuring other public banks."
And Algeria is listening. In this context, the state-owned bank Credit Populaire d'Algerie (CPA) is the country's first financial institution to go on the selling block. It's not ready yet but the wheels are in motion. This year, the government, with the blessing and support of the IMF, has re-ignited the idea of privatizing CPA after it failed to do so in the past. Two years ago, the government sought the assistance of an investment bank to engineer the privatization of CPA and several international banks submitted their bids. However, the process was interrupted without the government providing an explanation.
Apart from the potential privatization of CPA, there are no specific plans in the foreseeable future for the other state banks, however the government has been talking about launching a banking and financial sector reform to "improve governance, the management and the financial structure" of the nation's public sector banks. Part of this reform is to modernize the banking sector with the introduction of basic universal banking practices such as an electronic payment system dealing with both large transactions and small accounts in retail banking. Such system is scheduled to go live in early 2006.
In a speech given at the US-Algeria Business Council Banking and Finance Symposium in New York on February 3, 2005, the IMF's Jules Erik De Vrijer described the Algerian banking sector in a clear way when he stated that "despite the licensing of 15 private banks since 1998, public banks continue to account for 9/10th of financial system assets and are burdened by sizable nonperforming loans to public enterprises. Public banks' losses averaged over 4% of GDP each year from 1991 to 2002 and continue to accumulate, albeit perhaps at a slower pace. These losses have not affected system stability because the Treasury has repurchased some of the nonperforming loans. These bail-outs, however, have distorted risk pricing and stunted the development of an appropriate credit culture. To address this issue, the 2005 government budget includes for the first time explicit subsidies to loss-making public enterprises to replace new bank credit. The Minister of Finance has also established a task force to determine residual stock losses and prospective flow losses of public enterprises.
Increasing the health of the banking system also requires improving banking supervision in many core areas. The failure of the largest Algerian private bank in 2003 exposed important gaps in supervision and regulation, and tarnished the public's opinion of domestic private banks. ...but the Bank of Algeria, with IMF technical assistance, is taking steps to increase its supervisory capacity, including by recruiting and training additional inspectors.
In the past, the passivity of the state shareholder of the largest banks has frustrated attempts at making public bank managers accountable. A recent positive development is that managers of public banks have signed performance contracts for 2004-05 with the Ministry of Finance. Public bank executives we met last year mentioned stronger emphasis on tighter credit risk management and more forceful loan recovery.
Many bankers in Algeria note that small- and medium-sized enterprises are very costly to screen and monitor because firms run several books. A business-friendlier tax regime would help improve the quality of their financial information. Also, sustained economic growth should increasingly provide incentives to small- and medium-sized enterprises to seek outside finance and play by the bankers' rules. In this regard, it is also important that progress is being made towards the implementation of a new accounting system by 2007.
Finally, the modernization of the payment system is moving ahead with World Bank assistance. The real-time gross settlement system is programmed to be operational by end-2005 and a contractor for the retail payment system has been selected last December (2004)".
The North Africa Journal 2005
